• Alex Howard

Vehicle finance explained

The distinguishing differences between HP, PCH, PCP and PL.



With the new year and end of the tax year fast approaching, it’s a perfect time to get those new vans. But which method of loan or finance is going to suit you best? Here are some considerations to factor in for Hire Purchase (HP), Personal Contract Hire (PCH), Personal Contract Purchase (PCP) and Personal Loan (PL) – to help you decide which is right for you.


Hire Purchase (HP)

HP normally requires a deposit, followed by monthly payments with an optional purchase fee at the end. The optional purchase fee is not normally any more than the monthly payments. At the end of the agreement, the vehicle will be owned by yourself.

Pros:

  • You will be able to obtain the vehicle that you may not have been able to afford otherwise

  • You do not need to estimate your mileage so there would be no excess mileage fees

  • Once you have made the optional purchase fee, the vehicle is yours

Cons:

  • The monthly repayments may be a lot higher than other methods of finance due to you paying the entire value of the vehicle off by the end of the agreement

  • If you sell the vehicle, you would be required to settle the outstanding finance. If you sell it for less than the outstanding finance, you would be liable for the balance

  • If you were to have a crash, if the insurance pay-out was lower than the finance, you would also be liable for the balance. Optional GAP (Guaranteed Auto Protection) can be taken out to cover this difference


Personal Contract Hire (PCH)

Unlike other finance options, at the end of the PCH you will not own the vehicle. You simply hand the vehicle back.

Pros:

  • You do not need to worry about selling the vehicle at the end of the agreement, you just hand it back

  • Most agreements will have an added service of ongoing maintenance. This can alleviate some worry’s regarding expensive unexpected repair bills

  • The monthly payment will be considerably lower than if you were purchasing. This can bring higher spec vehicles into your budget.

Cons:

  • You never own the vehicle. The vehicle needs to be returned at the end of the agreement.

  • An annual mileage needs to be agreed at the start of the contract. Exceeding this can attract additional fees

  • You are tied into a contract and there are normally high charges if you want to leave the contract early.


Personal Contract Purchase (PCP)

PCP is very similar to HP in that you are normally required to pay an initial deposit, followed by monthly instalments over an agreed period. The difference is that with PCP you are only paying off the depreciation of the vehicle. At the end of the agreement, you will be required to pay a balloon payment if you want to keep the vehicle. This is known as the GFV (Guaranteed Future Value). The GFV is the expected value of the vehicle at the end of the agreement. The monthly payments you make, will be paying the difference between what the vehicle is worth today and what the GFV will be at the end of the agreement. At the end of the agreement, you have one of three options –

  1. Pay the balloon payment

  2. Hand the vehicle back. As they have already agreed the value with the GFV, you will have no balance left to pay

  3. Part exchange for a new vehicle

Pros:

  • Monthly payments are normally lower than HP as you are only paying off part of the vehicles value

  • If you don’t want to keep the vehicle at the end of the agreement, simply hand it back

  • If you give the vehicle back, you can simply renew for another vehicle. Never worrying about selling it on

  • If the vehicle is worth more than the GFV at the and of the agreement, you would have positive equity If you were to part exchange it for another vehicle

Cons:

  • You will need to agree an annual mileage

  • If you sell the vehicle, you would be required to settle the outstanding finance. If you sell it for less than the outstanding finance, you would be liable for the balance

  • The vehicle isn’t yours until all payments have been made

  • You would need to keep the vehicle maintained, insured and in your possession until you make all the payments


Personal Loan (PL)

You can take out a personal loan for the entire value of the vehicle or just the short fall you have. This can be beneficial if you don’t have any deposit so put towards a new vehicle.

Pros:

  • Depending on the type of PL, you would own the vehicle. Giving you complete control on mileage and if you wanted to sell it

  • The PL could cover the entire vehicle value

  • You may be able to make additional payments to pay the PL off sooner

Cons:

  • Depending on the type of PL, you may be required to pay the balance of the loan if you were to sell the vehicle

  • The monthly payments may be higher than PCP as you are paying the entire value of the vehicle back

It is crucial that before entering any agreement, you can financially afford the agreed monthly payments. Each have selling points but its always worth getting as much information as possible before you enter into any agreement.

If you need to discuss the pros and cons for each in regards to taxation, feel free to get in touch. 


Here at Howards Accountants, we can provide the complete end to end service. From setting you up with HMRC, guiding you though your first year to filing your Tax Return all from £25pm. We offer fixed fees with unlimited support at no extra cost and no surprise fees, perfect for budgeting and the clients that need that extra support.


Get in touch to see how we can help you.

Howards Accountants is a trading name of Howards Business Services Ltd. Howards Business Services Ltd is registered in England and Wales under Company number 10849750 and the registered office is at Suite 17, Camborne Business Centre, Weeth Lane, Camborne, Cornwall, England, TR14 7DB.

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